Deficit reduction: Is Obama's $4 trillion goal big enough?
Though their plans differ dramatically, President Obama and the GOP agree that the deficit needs to be reduced by about $4 trillion over the next 10 to 12 years, in order to reassure credit markets and get the debt under control.
President Obama set what sounds like an ambitious target this week: Cut the federal deficit by a total of $4 trillion over the next dozen years.
But for all the attention on the number – $4 trillion – it's not so obvious how big that number really is.
Is it too small to dent the nation's federal debt problem? So big that the resulting austerity will be draconian? Or a Goldilocks amount – just the right balance for taxpayers and the economy?
First, for context, the president's number would not eliminate budget deficits. Rather, he's seeking to reduce annual deficits to a level where the economy is growing faster than the national debt. The result, if Mr. Obama's goal is achieved, would be that public debt would begin to decline as a percentage of gross domestic product (GDP).
Some nonpartisan experts on government finances say the Obama number is a good start, but that it falls a bit short of what the country needs.
"The plan itself contains less in savings than the White House Fiscal Commission recommended, which we look at as the minimum of what is needed to reassure credit markets and get our debt levels back on track," the Committee for a Responsible Federal Budget said in a statement Wednesday.
Obama's plan seeks a level of deficit reduction in 12 years that the fiscal commission sought in a nine-year period, says the nonprofit group, which includes Democratic and Republican advocates of fiscal responsibility.
Of course, that's just one take on Obama's target. Still, that's a view from a centrist organization that thinks a lot about the nation's debt problems.
To the right of Obama, many Republicans would like to see a balanced-budget amendment to the US Constitution, including a cap on federal spending as a share of gross domestic product (GDP). Such an amendment might allow a bigger reduction in deficits.
To Obama's left, some Democrats are outlining budget visions that don't make such steep cuts.
For example, Rep. Chris Van Hollen (D) of Maryland this week introduced a budget proposal for House Democrats. The plan seeks to cut the deficit by $1.2 trillion more than the budget Obama introduced earlier this year, but significantly less than the plan announced Wednesday.
Members of both parties generally agree that the public debt is a serious danger to the economy, and that policymakers can't afford to delay much longer in crafting long-term plans to hold the debt in check.
How does the Obama plan compare with the Republican budget proposal put forward last week by Rep. Paul Ryan, chairman of the House Budget Committee?
Both would reduce the level of deficits sharply compared with a status quo option in which tax rates and spending stay essentially unchanged. Both call for having the national debt on the decline – if measured as a share of GDP – by later this decade. Neither calls for balancing the budget or paying down the debt by 2021.
The Republicans say their deficit reduction adds up to $4.4 trillion over the 10 years from 2012 to 2021. Their spending cuts are deeper – about $5.8 trillion – but they also cut taxes.
But both plans come with some uncertainties. For example, it was not immediately clear this week what baseline the Obama plan is measured against. He wants $4 trillion in savings, but relative to what starting point? A senior White House official, in a Wednesday briefing, didn't give a detailed answer but cited an "adjusted" baseline from the Congressional Budget Office (CBO).
On Thursday, White House spokesman Jay Carney described the president's plan as roughly sharing the Ryan target – with both plans in the ballpark of $4 trillion.
The CBO has estimated that the Republican plan would hold the public debt to 70 percent of GDP as of 2022, measurably lower than the 95 percent debt-to-GDP ratio the CBO expects under an alternative (basically status quo) scenario. The Obama plan might achieve similar results.
Time would tell whether such plans would persuade financial markets that the US is successfully correcting its fiscal course. A key is not just whether debt ceases to grow by the end of this decade, but whether the outlook for the decade after that improves. That's when baby boom retirements will ramp into higher gear, potentially straining programs like Medicare and Medicaid.
Regardless of the right number for deficit reduction, another, equally vital question is how to get there.
While the Obama budget plan relies largely on tax hikes for well-to-do Americans, Republicans brag that their plan won't raise taxes. Meanwhile, Obama harshly criticized the GOP plan for its cuts to Medicare and other programs that benefit middle-class or lower-income Americans.